Accounts receivable
Also known as: receivables, trade receivables, AR
Accounts receivable is the money customers owe a company for goods or services delivered on credit but not yet paid for. It appears on the balance sheet as a current asset because it is expected to convert to cash within a year.
Accounts receivable (AR) represents amounts a business has billed to customers but not yet collected. When a company sells on credit, it recognizes revenue at the time of sale and records a matching receivable — an asset reflecting its legal claim to the customer's payment. When the customer pays, the receivable is reduced and cash increases.
For example, if a wholesaler ships $10,000 of goods with 30-day payment terms, it debits accounts receivable and credits sales revenue for $10,000. Because not every customer pays, companies also estimate uncollectible amounts and record an allowance for doubtful accounts, reporting receivables at their net realizable value — the amount actually expected to be collected.
Receivables are central to working capital management. Analysts track the receivables turnover ratio and days sales outstanding (DSO) to see how quickly a company converts credit sales into cash: a rising DSO can signal collection problems or overly loose credit terms. Receivables also feed liquidity measures like the current and quick ratios, and companies short on cash can factor (sell) their receivables to raise funds immediately.
Accounts receivable is tested across accounting and finance exams. CMA Part 1 and ACCA Financial Accounting cover recognition, the allowance method, and write-offs in depth, while the Series 66 touches receivables through fundamental analysis and financial ratios.
Key takeaways
- Accounts receivable is a current asset representing unpaid customer invoices from credit sales.
- Under accrual accounting, revenue and the receivable are recorded at the time of sale, not when cash arrives.
- The allowance for doubtful accounts reduces receivables to the net amount actually expected to be collected.
- Receivables turnover and days sales outstanding measure how efficiently a company collects from customers.
- CMA Part 1, ACCA FA, and the Series 66 all test receivables recognition, valuation, or related ratios.